Hope our earlier posts on trading concepts Part I, II and III have been of help to those who are new to Option trading. (Click here to read our earlier posts.)
In this section we focus on the seller of the contract, as well as how one can actually buy and sell an Option. An option is essentially a contract.
The seller of an option or contract is called an Option Writer. He sells the Put or Call option at an amount which is called ‘premium’ and the premium amount (minus brokerage) goes to him.
An Option writer is the one who initiates the option trading. An Option writer places his offer of selling a Put Option or a Call Option in the stock exchange, quoting his offer price at which he wants to sell the contract, just like one offers shares in the bourses.
Similarly the buyer of a Call or Put has to place bid for buying the option in the exchange just like he places bid for the shares he wants to buy.
Anyone, i.e. even you, can be a buyer or a writer (i.e. seller) of a Put or a Call option. What one pays or gets for buying or selling an option is just the premium at which the contract gets bought or sold.
The premium increases or decreases as the price of the underlying share or index changes and the trader gains or loses money by buying and selling these contracts at the changing premium.
The premium increases or decreases as the price of the underlying share or index changes and the trader gains or loses money by buying and selling these contracts at the changing premium.
In our next post we will introduce the idea of 'in the money', 'at the money' and 'out of the money' options and also how options help in 'hedging'.
One may feel free to write or ask.
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